Austerity? We don't need no stinking austerity!

Paul Krugman has put out an op-ed piece in the New York Times accusing governments on both sides of the Atlantic of not doing enough to provide jobs for the unemployed. He believes that governments are sacrificing the welfare of their citizens because they are giving undue influence to the owners of capital. The interests of bondholders are being protected at the expense of ordinary people. He doesn’t quite use the phrase “sinister cabal of international financiers,” but he comes close.

I know the guy has a Nobel Prize in Economics and I don’t, but really, I think he’s overstating his case. Krugman argues that as long as the unemployment rate is high, governments need to do more deficit spending, even if printing money to pay the bondholders kicks off a higher inflation rate. And if a few governments have to default on their loans, well, that’s a small price to pay. Sure, the bankers will take losses, but look how much good they’ve done!

Maybe the politicians are reluctant to dig the financial hole deeper because they remember their grandmother’s telling them to always spend a little less than they earn. Maybe the politicians don’t want to saddle their children with huge debt payments. You know, principled arguments against taking on too much debt. Aw, who am I kidding, these are politicians I’m talking about. They probably are listening to the bankers.

Still, there is nothing sinister about not wanting to lose money. I’m not an international financier, but I’m not wild about losing money on bad investments. Let’s picture a conversation between an International Financier and a Liberal Politician:

LP: I know we’re borrowing 40% of every dollar we spend, but I’m thinking we need to increase our spending.
IF: If you continue to increase your debt, there’s a good chance you won’t be able to pay back the money you’re borrowing. If I don’t think I’m going to be paid back, I’m not going to loan you any more money.
LP: But you have to keep loaning me money. Even after this crisis is past, we’re still going to be spending more than we take in taxes.
IF: You’re very telegenic, and you’ve got charisma coming out your ears, but I don’t think you heard me. If I don’t think I’m going to be paid back, I’m going to stop loaning you money.
LP: But people need jobs!
IF: Not my problem. My problem is getting paid back with interest. If I loan you too much money, you won’t be able to pay it all back.
LP: You will get paid back! I own a printing press, and I can just print off more money. Problem solved.
IF: *sigh* If you print more money, than you set off inflation. If you have 8% inflation, and my bonds are drawing 4% interest, that is a negative 4% return. I don’t loan people money in order to lose it.
LP: So you’re telling me that if I increase our deficit spending, you’re going to cut me off.
IF: In a nutshell, yes.
LP: Well, I guess I can’t increase the amount of deficit spending then, even though I want to.

There is no great conspiracy here. Just a lot of people pointing out that even great nations have to eventually pay back the money they borrow, and that it is a bad idea to dig that hole deeper then you can climb out of.

It doesn’t really take a Nobel Prize to figure that out.